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Comment by flexie | Hacker News Reader

Always interesting to speculate about what would happen.

A default in the traditional sense probably won't happen this October but one day in our lifetime they are going to have to come up with a way to finance the 126 trillion unfunded liabilities: http://www.usdebtclock.org/

One way to do that - without defaulting in a legal sense - is to work the printing press and call it stimulation or monetary easing. Nah, Quantitative easing! That's a nice term.

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It's misleading to call those unfunded liabilities. Most of that is Social Security and Medicare projected expenditures. Unlike true liabilities, those are not legally guaranteed. The government can reduce eligibility for those programs, reduce payouts, etc, without being in default, unlike say a state pension plan.

Comparing them against current assets is equally misleading. Say you plan to spend $2k on rent for the indefinite future. That's $24k per year, $240k per decade, etc. Are you insolvent if you don't have all that in the bank now? No, of course not. Those are ongoing expenses paid out of ongoing income.

The Medicare trustee estimates the unfunded liability of Medicare at $40 trillion over 75 years (the $123 trillion figure includes a Medicare estimate of twice that). Projected GDP over that period is $907 trillion.

Finally, there is nothing wrong with quantitative easing. The people that'll be hurt by inflation are by and large the same ones whose fault the current financial mess is (older people own most u.s. assets). The government will probably encourage inflation at some point to reduce the value of these expenditures as a percentage of GDP without making nominal cuts. I don't see a problem with that readjustment.

The thing about quantitative easing is that it is not producing much if any inflation and that is because it is not the same thing as printing money as so many people like to call it and distributing it to everyone in the US.

This is mainly because all that money that is being injected into the banks is not going anywhere. They are not lending it out but keeping it in a vault. To show a graphic of this here is a chart of bank excess reserves held which is the amount of money held over the reserve requirement.

http://upload.wikimedia.org/wikipedia/en/8/81/EXCRESNS.png

This is actually out of date and the total is now at 2.3 trillion.

Looks like they cannot end QE-to-∞

Reuters "The Fed has no clue what will happen when it starts selling assets," IMF Chief Economist Olivier Blanchard told a meeting of the Institute of International Finance in Paris. "So it cannot make any commitments in term of quantities." http://uk.reuters.com/article/2013/06/25/us-economy-imf-idUK...

And Medicare dominates Social Security, so what we're really talking about here is the unchecked growth in medical expenditures. Which is, in turn, subject to change by public policy.

Right. Out of that $123 trillion figure, $80 trillion is medicare. Not only is it subject to changes in policy, it's also much more susceptible to manipulation (upward and downward) to make the problem seem bigger or smaller than it really is, because of the uncertainty of medical expense growth going forward.

Whenever I see interesting events like this, my first thought is not "what would happen" but always "how could I profit from what would happen [or the uncertainty around it]".

Unfortunately I never know how to answer that question convincingly enough to put my money where my mouth is. Does anybody know if there's a place where people discuss these sorts of things, e.g. a "Hacker News for Financial Markets"? Any interesting ideas for coming out of this on top?

EDIT: Two answers have pointed to gold. Yup, I have already played with investing in gold ETFs, which generated a 20% return over the past 2 years, even after fees. However I was wondering if there were any more ideas specific to the present circumstances, and where, if anywhere, people discuss this sort of thing?

Some people invest in gold, silver and/or Bitcoin as a hedge against fiat currency collapse.

Decide what you think would replace assets in Central Bank balance sheets to allow world trade to continue - ie: what would settle world trade deficits.

Yuan, gold, silver or bitcoin?

Hint: Bitcoin and silver are not held by central banks as assets. Yuan's value is subject to the policy of China's politburo. Fool me once on the USD...

That leaves one asset that can't be printed into existence: http://www.ecb.europa.eu/press/pr/wfs/2013/html/fs130924.en....

World trade does not need any central bank to continue. People only need freedom to do transactions without constant interference. If gov currencies are to collapse, there are only to choices: private IOUs in private banks backed or not by gold (either way, a huge amount of trust is needed to be placed in the banks, almost no one is going to move gold across the world all the time); or bitcoin - which enables world trade without necessary placing trust in intermediaries.

Gold doesn't need to move, only the name under which it is stored needs to change. Bitcoin - a four year old currency invented by a pseudonym - is not going to be used to clear trades at a sovereign level. Arabs are not going to ship oil in the ground for bitcoin.

If gold is not moved, it's as good as a promise of the vault owner that holds it for you. History shows that this promise was constantly broken before and after invention of central banking.

To own either bitcoin or gold you need to move it in your personal vault. But in case of bitcoin, it's many times cheaper to move it and have many vaults with extra protections.

Arabs will happily ship oil for bitcoin when both buyers and sellers of oil will no longer be able to use USD or trust banks standing in the way. And, of course, when they learn about bitcoin and we have better infrastructure to support secure storage and trade.

What I find interesting is that the economists tell us that country level borrowing isn't the same as household borrowing.

Which must be true otherwise why would governments be able to borrow more? Clearly they can devalue the currency and by extension the debt, however the money lenders will just factor that into their interest rates.

I like a country to be in debt, that way it will always be looking for efficiencies. The question is how much debt is acceptable?

Please keep in mind that this is being published by Bloomberg - not exactly a neutral party in the debate. They stand to lose a lot of money and even more clients if this were to happen.

Raise retirement to 70, go single-payer and name the price of all things medical, and put a little resistance on SSD claims and then there's no problem. That's because these "liabilities' are actually discretionary, unlike actual bonds.

Comparatively, USA looks really good though, unless I'm missing something(?): http://www.usdebtclock.org/world-debt-clock.html

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